Dynamic adjustment and long-run equilibria: Panel data estimates for the East German states

The economic development in East Germany after unification shows both, success and failure. In the early nineties wages and productivity increased fast; later on catching up faded out. A central question from a policy viewpoint is whether this fading out indicates a reduction of the adjustment speed or an equilibrium gap. This points towards a stationarity analysis of differences between East and West Germany. Our paper presents panel data estimates for the East German states for wages, productivity, competitiveness and unemployment. The results reveal that the adjustment was fast, but the equilibrium gaps are large.